New federal legislation says universities must agree to provide not just deterrents but also "alternatives" to peer-to-peer piracy, such as paying monthly subscription fees to the music industry for their students, on penalty of losing all financial aid for their students.

The U.S. House of Representatives bill (PDF), which was introduced late Friday by top Democratic politicians, could give the movie and music industries a new revenue stream by pressuring schools into signing up for monthly subscription services such as Ruckus and Napster. Ruckus is advertising-supported, and Napster charges a monthly fee per student.

The Motion Picture Association of America (MPAA) applauded the proposal, which is embedded in a 747-page spending and financial aid bill. "We very much support the language in the bill, which requires universities to provide evidence that they have a plan for implementing a technology to address illegal file sharing," said Angela Martinez, a spokeswoman for the MPAA.

According to the bill, if universities did not agree to test "technology-based deterrents to prevent such illegal activity," all of their students--even ones who don't own a computer--would lose federal financial aid.

The prospect of losing a combined total of nearly $100 billion a year in federal financial aid, coupled with the possibility of overzealous copyright-bots limiting the sharing of legitimate content, has alarmed university officials.

"Such an extraordinarily inappropriate and punitive outcome would result in all students on that campus losing their federal financial aid--including Pell grants and student loans that are essential to their ability to attend college, advance their education, and acquire the skills necessary to compete in the 21st-century economy," a letter from university officials to Congress written on Wednesday said. "Lower-income students, those most in need of federal financial aid, would be harmed most under the entertainment industry's proposal."

The letter was signed by the chancellor of the University of Maryland system, the president of Stanford University, the general counsel of Yale University, and the president of Penn State.

They stress that the "higher education community recognizes the seriousness of the problem of illegal peer-to-peer file sharing and has long been committed to working with the entertainment industry to find a workable solution to the problem." In addition, the letter says that colleges and universities are responsible for "only a small fraction of illegal file sharing."

The MPAA says the university presidents are overreacting. An MPAA representative sent CNET News.com a list of campuses that have begun filtering files transferred on their networks, including the University of Florida (Red Lambda technology); the University of Utah (network monitoring and Audible Magic); and Ohio's Wittenberg University (Audible Magic).

For each school taking such steps, the MPAA says, copyright complaints dramatically decreased, in some cases going from 50 a month to none.